Big-bucks deal may be near to spur local home building: industry eyes $300 million from pension funds in East.

A new coalition of homebuilders may soon finalize an agreement with East Coast pension funds for up to $300 million in construction financing for Southern California housing projects.

Building Industry Association members from throughout Southern California -- including 600 from Los Angeles County -- have created Building Industry Capital Realty Advisors. Mark Held, the new group's president, and Michael Kahn, a partner in the Del Mar-based real estate consulting firm of Goodkin Kahn & Associates, met with administrators and advisers for seven East Coast pension funds last week.

Held was pleased with the outcome of the meetings.

"We hope to finalize an agreement with Copley Realty Advisors and Aldrich Eastman & Walsh in the next two weeks to fund the pool," he said. Both pension fund advisers are in Boston.

"The fund managers we talked to in the Northeast were encouraged that CalPERS (California Public Employees Retirement System pension fund) had made a commitment to construction financing for homebuilders," BICRA President Held said.

The BICRA pool will be managed by a three-member advisory board of Southern California's biggest homebuilders. They won't borrow from the fund since they already have financing through corporate lines of credit. But they will evaluate each financing application, said BICRA's Held. Building Industry of Southern California leaders will make a final decision on the three-member board by the end of January, Held said.

The new capital pool should help fire-up the flickering Los Angeles County building industry, which lost more than 10,000 construction jobs in the first nine months of 1991. On a statewide basis, more than 106,000 construction jobs were eliminated in the same period. The Burbank-based Construction Industry Research Board predicts the number will grow before the new construction financing agreements are finalized.

When property values were rising in the mid-1980s, builders had no trouble borrowing money to buy and develop residential lots. But for the past two years, as values dropped, small and midsized homebuilders haven't been able to get construction financing.

Pension fund money typically has gone into building office towers, but the BICRA fund would be used only to finance construction of new homes, said Ron Saienni. He is vice chairman of government affairs for the Building Industry Association of Southern California and president of Newport Beach-based Quantum Development.

The BICRA fund would be the second pool formed this year to provide construction financing for homes. In early January, CalPERS agreed to provide $225 million for new home construction financing throughout California. Unlike the CalPERS fund, only Southern California Building Industry Association members will be able to borrow from the BICRA fund.

Coupled with the $225 million CalPERS plans to invest in housing, the BICRA fund could help trigger a recovery in Southern California's housing industry.

Though $300 million may sound like a lot of money, most pension funds don't make investments of less than $100 million, said Fred Pierce, West Coast director of real estate consulting for Price Waterhouse. At the same time, Pierce said, the CalPERS commitment to construction financing could rise from $225 million to $500 million or $600 million by the middle of 1992 if CalPERS likes the way the program is managed.

Builders need the construction financing to pay their subcontractors and suppliers while they are building new homes. Over a 24-month period, a phase of houses can be built and sold and the homebuilder can pay back all the money he has borrowed from the BICRA fund. While the homes are being built, the borrower has to pay the monthly interest on the unpaid balance.

Builders who borrow from BICRA won't get cheap money. Held said the fund wants to lend money in $10-million blocks at an interest rate of 10 to 11 percent. Besides paying interest, the borrowing builder would give BICRA 50 percent of the profit in each home financed from its pool. BICRA in turn must give 60 percent of its 50 percent to the pension funds that provide the financing, Held said.

For example, if a builder borrows $10 million at 12 percent for 24 months, he has to pay $100,000 per month in interest to BICRA. If the builder makes a $5 million profit on the homes he builds with the BICRA money, he gets to keep $2.5 million and BICRA gets $2.5 million. BICRA then has to turn around and give the pension funds that create the lending pool $1.5 million of its $2.5 million.

By comparison, builders who have revolving lines of corporate credit with banks pay 8.5 to 9.5 percent for their construction funds and don't give the bank a percentage of their profits.

Unlike the BICRA fund, a pension fund that by itself or through a capital pool invests in office, retail or industrial buildings faces greater risk, in part because the sums involved in such projects are much larger.

In the past, office building developers borrowed construction financing from banks. As soon as they finished the buildings, the developers would get so-called take-out loans from the pension funds to pay off their construction loans.

Pension funds have often been involved in funding take-out loans. The borrower makes payments as though it has a 30-year loan, but the unpaid balance is due in three or five years.

As a result, most of the borrower's monthly payment goes for interest -- and on a three-year $100 million take-out loan, an office developer may owe $98 million at the end of the term. At that point, it has to get a permanent loan to pay off the take-out loan from the pension company.

Now that the office market is glutted, lease rates are soft, vacancy rates are high, and property values have fallen, developers can't get permanent loans to pay off their take-out loans. Many take-out loans are in default. In other cases, pension funds have renegotiated the loan terms. Others have repossessed the property.

Stung by such experiences, many pension funds have adopted a sour attitude toward investing in any kind of real estate.

But providing construction financing for homes, in theory, is not as risky as providing take-out financing for office buildings. Instead of lending $100 million on one property, a pension fund or a group of pension funds lends money in smaller blocks.

"Pension funds have been angry at their advisers for putting them into commercial real estate," said Sanford Goodkin, Kahn's partner in Del Mar-based Goodkin Kahn & Associates. "The advisers say it is tough to show them why investing in construction financing to build homes isn't the same thing as financing or buying office buildings."

Price Waterhouse's Pierce said that, as a whole, the pension funds still lack interest in real estate investments because of their unhappy experience in commercial building financing.

"But on a selective basis, some of them may have a contrarian strategy," Pierce said. "I am convinced they (BICRA) will be successful."